Managing climate risk: extreme weather events and the future of insurance in a climate-changed world

Abstract

Recent extreme weather events in eastern Australia have again raised questions in the public sphere about the nature of links between anthropogenic climate change and extreme weather events. Demonstrating that anthropogenic climate change was wholly responsible for any extreme weather event may never be possible in a system as complex as the Earth's. Yet the extent to which anthropogenic climate change increased the likelihood of some specific extreme weather events occurring can be quantified. However, this article argues that unmitigated climate change threatens not just measurable, increased likelihoods of extreme events, but over time, wholly unpredictable frequencies for extreme weather events. This article asks what the prospects might be for continued provision of insurance in a climate-changed world, for the insurance sector as well as the societies dependent on insurance as a primary tool to manage financial risks. The article argues that ultimately, the only viable way to insure against climate risks will be through effective mitigation of climate change: deep and rapid cuts in emissions now as a ‘premium’ to avoid uninsurable climate risks in the future.

Keywords:

• climatic uncertainty
• environmental risk
• Fraction Attributable Risk
• complex adaptive systems
• mitigation

Acknowledgements

Thank you to the editors and an anonymous referee for very helpful and much appreciated comments on an earlier draft.

Notes

1. This paper synthesises and extends on elements of three earlier pieces: Phelan et al. (2010, 2011a, 2011b).